Paying Off Equity Release Early & Early Repayment Charges
You can pay back Equity Release early but you may be subject to an early repayment charge. Read more to get the best help
If you have an equity release plan but don’t want to be stuck with a potentially hefty debt for the rest of your life, there’s a solution. You could make early repayments.
Different lenders have their own rules around paying back equity release early, with some imposing limits on how much they’ll let you pay back and others requiring additional fees.
In this guide, we’ve put together everything you need to know about early equity release repayments, including how they work, how much they cost and how a broker can help.
Read on for more information or jump to the section that’s relevant to you via the links below…
Can you pay off equity release early?
Yes, if you have a lifetime mortgage, which is the most common equity release product, you can make early repayments if you wish to.
However, there’s no obligation. Remember, these loans are designed so that no payments are due until either you die or move into long term care. If you do decide to make early repayments, there are a few different options.
You may be able to just pay back the interest on the loan. Alternatively, you could make partial payments to reduce the overall loan, although this tends to be capped at up to a certain percentage of the amount borrowed, for example, 10% a year.
In some situations, you may be able to repay the entire loan, but this would typically come with a very high early repayment charge (see below for more on costs) so it would be wise to seek advice from a specialist equity release broker before making any decisions.
Why would you repay equity release early?
As mentioned above, there’s no need to make any early repayments. However, if you have cash from a property sale or an inheritance, or you have excess funds in your pension pot, you might want to reduce the size of your loan in order to increase the size of inheritance you leave.
Another scenario might be that you’ve had a change of heart about your living situation and want to buy a new primary residence, without being saddled with a debt on your current property.
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How much does it cost?
If you decide to pay back your equity release loan early, your lender may ask you to pay an early repayment charge. This fee is to compensate them for the losses they’ll incur by you repaying earlier than expected.
Different lenders have their own rules around early repayment charges and it’s important that you understand your lender’s terms in advance.
What are the early repayment charges?
Some lenders will charge a fixed rate which may vary depending on how long you’ve had the loan. For example, they may charge 7% in the first five years, 5% in years 6 to 8, and then nothing from year 9 onwards.
Other lenders may let you repay a certain amount each year – for example, 10% – without incurring any fees.
Some lenders, Aviva and Legal & General for example, charge a variable rate, which means you won’t know how much you’ll have to pay until you request to make an early repayment.
These lenders allocate a gilt (a government security) to your plan on day one and levy a charge based on how far the gilt yield has fallen or risen by on the day you request to make an early repayment. If the gilt yield has fallen, you’ll be charged a fee. If it has stayed the same or gone up, there’s no penalty.
It’s worth noting that some lenders will base their early repayment charge on the initial amount borrowed, while others will use the current outstanding balance.
How do you repay early?
Making an early repayment should be pretty straightforward. Here are three simple steps to ensure the process goes smoothly:
check the terms of your plan
As previously mentioned, different lenders have their own rules around how much you’re able to repay early and how much it will cost you. To avoid any nasty surprises and to make sure it makes sense economically to make an early repayment, take a look at the terms of your plan. If you’re not sure where to find the details, contact your lender directly.
speak to a broker
The rules around early repayment charges can be pretty complex so it’s a good idea to seek help from an equity release expert who’ll be able to work out how much you’ll need to pay and offer you tailored advice around whether or not it’s worth making early repayments or not.
We have a network of highly experienced brokers ready and waiting to help you. Get in touch and we can arrange for one who specialises in helping people pay back equity release loans early to contact you directly.
set up payment
If you’ve spoken to a broker and are ready to go ahead, the final step is setting up the payment. This can be done through a one off direct debit or regular standing order or via cheque, bank transfer or over the phone. Check which payment methods your lender accepts.
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What is downsizing protection?
This is a form of protection offered by some lenders which allows you to pay back your equity release loan in full without incurring any early repayment charges when you move to a new home that doesn’t meet your lender’s criteria.
Although it’s called downsizing protection, you don’t necessarily need to be moving to a smaller house.
There tend to be restrictions around this form of protection, however. For example, lenders will typically require you to have had your loan for at least five years.
Which lenders let you repay early?
All lenders will let you make early repayments.
However, since 28 March 2022, it’s been compulsory for all members of the Equity Release Council (ERC), the equity release industry body, to allow customers taking out lifetime mortgages to make penalty-free partial repayments.
So, as long as your loan is ERC-approved, you’ll be able to repay at least some of it early, with no early repayment charge.
Remember, this new rule only applies to new applications made after 28 March.
Connect with an equity release expert today
Choosing to make early repayments on your equity release loan is a big decision and one that shouldn’t be taken lightly. That’s why it’s worth seeking advice from a specialist broker who can look at your specific circumstances and determine the best course of action for your needs.
We work with brokers who have a track record of helping equity release borrowers make early repayments. Give us a call on 0808 189 0463 or make an enquiry and get matched with an expert today for a free initial conversation.
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There are certain circumstances where early repayment charges won’t apply, for example, if payments are made after the death of the borrower or the borrower moves into long term care, or if the lender has downsizing protection. In addition, your lender may allow voluntary penalty-free repayments up to a certain amount.
You could also avoid an early repayment charge if you move house. You won’t necessarily have to pay back your loan (which could incur a hefty charge). Instead, you can port your plan, as long as the new property meets your lender’s borrowing criteria.
This will come down to your individual circumstances. Some early repayment charges can be very expensive which is why it’s wise to speak to an equity release advisor who can review your situation and help you decide whether early repayments are worth it.
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